The 2016 US Presidential election proved to be anything but
predictable, though the election of Donald J. Trump as 45th
President of the United States is likely to mean that high net
worth earners and investors will benefit significantly from
proposed income tax reform.

Hilary Clinton was believed to be the heavy favorite going into
election night, meaning that most tax policy analysts and tax
practitioners focused on Clinton's tax proposals, which
included significant changes to the scope of the estate and gift
tax, along with income tax changes aimed at increasing taxes on the
wealthy.

In addition to taking the White House, Republicans will now control
both the House of Representatives and the Senate. Consequently,
many of the proposals included in the Republican House and Ways
Committee Report, issued on June 24, 2016, have a reasonable, if
not likely, possibility of becoming the law of the land. These
proposals in many respects overlap Trump's proposals.

In light of the Republicans' control of the House, Senate, and
White House, here are some possible legislative changes we could
expect to see in the coming year under a Trump administration:

Individual

Consolidate the current seven income tax brackets into three,
with rates on ordinary income of 12%, 25% and 33%.

Tax carried interest income at ordinary income rates.

Capital gains and qualified dividends taxed at a maximum rate
of 20% and eliminate the 3.8% Affordable Care Act surtax (Net
Investment Income Tax); note, however, that the House Report drops
the maximum rate to 16.5%, while also reducing tax rates on
interest income.

Eliminate all itemized deductions except for home mortgage
interest and charitable contributions; however, Trump's
proposal includes a $200,000 cap on such deductions.

Eliminate the individual alternative minimum tax.

Eliminate federal estate and possibly generation-skipping
taxes, while still allowing step-up in basis for estates under $10
million (Trump's proposal refers only to "death
taxes" and has capital gain recognition at death for assets
valued above $10 million, whereas the House proposal would repeal
estate and generation-skipping taxes and has no basis step-up at
death).

Neither proposal makes mention of a repeal of the gift tax, though
this would provide an opportunity to clients to transfer
significant wealth into multigenerational structures and possibly
restructure family vehicles in a way that could provide for more
flexible management and control than may be permitted under the
current regime.

Corporate/Business

Reduce the federal corporate tax rate to 15%.

This reduction could potentially stimulate international in-bound
investment into the United States because the US would be viewed as
a quasi-tax haven when compared to other taxing
jurisdictions.

Reduce the tax rate on business income earned by pass-through
entities, such as partnerships and S corporations, to 15% (however,
the House Report rate would be 25%).

Although the details of this proposal are unclear, Trump's
plan specifically states that "this rate is available to all
businesses, both big and small, that want to retain the profits
within the business."

Enact a deemed repatriation of currently deferred foreign
corporate profits, at a tax rate of 10%, and end tax deferral on
corporate income earned abroad.

Allow businesses engaged in manufacturing in the US to choose
between the full expensing of capital investments or the
deductibility of interest paid.

Eliminate the domestic production activities deductions and all
other business credits, except for the research and development
credit.

Conclusion and Observations:

A Trump administration combined with Republican control of the
Senate and the House will likely lead to significant tax
legislation in 2017. The possible content of that legislative
reform can be anticipated based on the President elect's tax
reform proposals and the Republican blueprint for tax reform
released by House Republicans this past summer. It appears likely
that estate and gift tax repeal with some form of carryover income
tax basis may happen as it has been a principal tax proposal for
most Republicans since 2002. However, Senate procedural rules may
force some sort of compromise, unless the legislation is enacted
through the budget reconciliation process.

If efforts to repeal the Federal estate (and possibly the gift tax)
are successful, there may be less need to utilize certain wealth
planning techniques designed solely to minimize Federal estate and
gift taxes and virtually all estate plans would need to be
modified. However, income tax planning will take on increased
importance and the use of wealth planning techniques to minimize
state estate taxes will remain. Similarly, the benefits of
thoughtful tax and wealth planning, including the use of trusts,
for family governance, family and business succession, asset
protection and preservation, income tax planning (including state
income tax planning), and distribution flexibility will continue to
be very important.

Income tax reform proposals include reduction of maximum rates for
39.6% to 33%, elimination of the 3.8% net investment income tax,
elimination of the alternative minimum tax, continuation and
expansion of lower tax rates on passive investment income and long
term gains and a new lower tax rate on business income. The impact
of these income tax reform proposals will save high net worth
earners and investors billions of dollars.

Corporate and business income tax reform will likely include
lowering of rates, elimination of popular business deductions and
foreign earnings repatriation incentives. These may provide
powerful incentives for enhanced investing in the US by US and
non-US investors. A 15% corporate tax rate may also change the form
in which business is conducted, and reverse the bias for
flow-through entity structures that has existed since 1986.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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